One of my few areas of domestic supremacy is as Grill-Meister. Whenever we have people over to dinner, I head to the grill, beer in hand, to tend to the hamburgers and hotdogs (or, for our better friends, steak and shrimp). While there are few complaints once the food is ready, more than once I have been accused of keeping the flame too low. At that point, I patiently explain that the meal is still getting cooked and to cook it any faster would be to risk burning it.
The American economy is also cooking slowly, despite occasional signs of a low flame. At first glance, last Friday’s jobs report seemed disappointing with just 156,000 jobs added and the unemployment rate ticking up to 5.0%, the same as its rate last December.
However, the details of the report actually provided a measure of vindication for Janet Yellen and the forecasters at the Federal Reserve. For some time, they have argued that if the unemployment rate fell low enough, the labor force participation rate would rise as people felt more encouraged to look for a job. This certainly seems to be the case over the past year, as the labor force has grown by more than 3 million people, or 1.9%, multiple times the growth in the working-age population. This surge has, in turn, slowed the decline in the unemployment rate.
Nevertheless, a relatively flat unemployment rate should not obscure the fact that the labor market is continuing to tighten. Compared to a year ago, there has been a further decline in the U6 unemployment rate, (which includes those working part time for economic reasons and those who have stopped looking for work because they feel there is no work out there for them). In addition, the average duration of unemployment has risen sharply relative to the median duration. In simple terms, this means that, while new labor market entrants and those recently laid off are getting a job quickly, there are some long-term unemployed who have gone years without finding a job and may just not be employable in today’s economy.
This finding is in line with another statistic from last week – the decline in the insured unemployment rate (that is those claiming unemployment benefits relative to those entitled to them) to its lowest level in over 45 years. The tightness in the job market is also showing up in the average hourly earnings of production workers, which grew by 2.7% over the past year, the fastest pace in over six years. Data due out this week, including Job Openings on Wednesday and Unemployment Claims on Thursday should continue to paint a picture of labor market strength.
Overall economic growth also appears to be heating up. Retail Sales on Friday should show a nice gain, reflecting strong auto sales although Consumer Sentiment may be dampened by the very negative tone of the election campaign. Thursday will see the release of Federal Budget Data for Fiscal 2016 which ended ten days ago. The usually very accurate Congressional Budget Office monthly forecasts are projecting a shortfall of $588 billion, or 3.2% of GDP, up sharply from $439 billion or 2.5% of GDP last year. The success of populist politics in America in 2016 suggests that the red ink is likely to grow going forward, heating up the economy in the short run but posing more significant problems for the bond market in the long run.
Finally, on the economic front, the week ahead will see the first inflation data for September with numbers due out on Import Prices on Thursday and Producer Prices on Friday. Both should show some increase in inflation pressures and, with oil prices firming in recent weeks, it looks increasingly likely that the headline personal consumption deflator will register year-over-year inflation above 2% by early next year, crossing an important threshold for the Federal Reserve.
The week ahead will also see the start of the third quarter earnings season, with 11 S&P500 companies reporting. Year-over-year trends on the dollar and oil look much more favorable than in recent quarters and with economic growth likely accelerating in the third quarter, this should be a relatively positive reporting season.
Overall, while the headlines from last Friday’s jobs report suggest little change in economic momentum and while political concerns are keeping attitudes glum for now, a broader look at the economy and markets show that growth, earnings and inflation are all gradually heating up, suggesting there is still opportunity for U.S. stocks in the eighth year of a long bull market.
David Kelly is chief global strategist at JPMorgan Funds.